Andrew Grice: It was a bland Budget, but the Chancellor remains remarkably upbeat

The timing of the fall of Baghdad was not good for Gordon Brown. Although the Chancellor did not want his seventh Budget to capture huge headlines about "gambling on growth", he had no desire to see the biggest day of his working year eclipsed by the Iraq war.

One Brown aide, slipped a note about the dramatic events on the streets of Baghdad, cried: "Oh, damn!" The official line from the Brown camp is that both Iraq and the Budget show the world is "moving on". Treasury aides pointed out that if the Budget had not been delayed from last month, its backdrop would have been much more uncertain.

For a Chancellor with a pretty bland Budget to present, Mr Brown has been remarkably upbeat in recent days. The commentators have been saying for months that his luck has finally run out.

But on Tuesday, there were cheers inside the Treasury when a piece of perfectly timed news arrived. The European Commission's growth forecasts turned out to be even more favourable to Britain – and worse for the 12 countries in the eurozone – than a leak to the German magazine Der Spiegel had suggested. It was manna from heaven for Mr Brown, fitting very nicely with his underlying theme of trumpeting Britain's stronger performance than its European rivals.

Although the Chancellor's forecasts for growth are more optimistic than those of independent analysts, close colleagues insist he is genuinely relaxed and confident that his figures will come good.

His two main worries, according to aides, are whether Labour will be able to show people a sufficient return on their investment in public services before the next general election and whether Britain can close the huge "productivity gap" he highlighted yesterday. "A lot of his intellectual energy is being poured into how we can make manufacturing industry genuinely competitive. He is really seized by this," said one aide.

Yesterday's package is bound to be regarded as a "wait and see" Budget and there will be some nervous waiting at the Treasury before Mr Brown produces his next one. As Michael Howard, the shadow Chancellor, put it to me: "He's Mr Micawber – waiting for something to turn up."

If the Chancellor's forecasts prove wrong, he will have some difficult choices before the next election. In Labour's first term, Mr Brown shrewdly got the bad news out of the way in the first two years, by sticking to the Tories' spending strait-jacket, before handing out his goodies before the 2001 election.

In the second term, Mr Brown may have got his timing wrong. If the economy grows more slowly than he predicts, he may have to raise taxes further or slow the rate at which public spending rises. Neither would play well in the run-up to an election.

There are other worries. Mr Brown insists he is sticking to his two golden economic rules, but some ministers fear he is in danger of breaking two of New Labour's articles of faith – don't become a "high-tax" party and don't alienate the business community. The Chancellor is more relaxed. Allies insist he did not pile on further tax rises yesterday on top of the 1p rise in national insurance contributions which took effect at the weekend. And they argued that business had got many of the measures it had been demanding.

It is true that Tony Blair had denied Mr Brown his wish to pull a giant rabbit out of his Budget hat by announcing his "not yet" verdict on whether Britain has passed his five tests for joining the euro. But Mr Brown's repeated comparisons with the eurozone left us in little doubt what his verdict will be when it is formally published, probably next month.

Relations between Mr Brown and Mr Blair are much better than during their nadir last autumn, helped by the Chancellor's strong public backing for the war.

But there was some traditional pre-Budget tension between them. A Blair aide quipped: "It was easier for him to discover what's going on in Basra than what was in Gordon's Budget."

Mr Blair has only delayed rather than prevented a retreat on the euro. The Brown camp has always believed that Mr Blair was wrong to make it an open secret that he wants a referendum before the next election, because a "not yet" or "no" verdict would damage him. Mr Brown's silence on the tests meant he would win whatever the result.

The Prime Minister will be anxious to find a "fig leaf" to cover his embarrassment before the assessment is published. He wants the tests to be reviewed again next year.

His advisers believe Britain's influence in European Union affairs will be reduced if our EU partners judge that the Government is "not serious" about joining the euro.

Mr Blair fears an "opportunity cost" through lower growth and foreign investment if Britain stays out for several years, as the Chancellor appears to want. But Mr Brown is not interested in crystal-ball gazing; he wants to read the book as it stands now. He is not about to take risks with the economy to allow a referendum he is in no hurry to see anyway.

Some Blairites describe Mr Brown as a "roadblock". One minister said: "In the first term, the politics on the euro was right but the economics were wrong. Now we're almost there on the economics but politics is the barrier."

The unpalatable truth for Mr Blair is that Mr Brown has a veto on the euro decision and that a referendum could not be won without his 100 per cent backing. So we should forget the fanciful talk from some Blairites that the Prime Minister, strengthened by a successful war, will shunt Mr Brown off to the Foreign Office and call a snap referendum. That would be seen as a political fix and, almost certainly, ensure the referendum was lost.